The Transmission Channels between Financial Sector and Real Economy in Light of the Current Financial Crisis: A Critical Survey of the Literature (original) (raw)
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This paper empirically tests the importance of the credit channel in the transmission of monetary policy. Three credit variables are analyzed: total bank loans, bank holdings of securities relative to loans, and the difference in the growth rate of short-term debt of small and large firms. In order to determine the marginal effect of the credit channel over the standard money channel, the significance of the credit variables is studied in a model that includes money (M2). In most cases, the credit variables play an insignificant role in the impact of monetary policy shocks on output. Public Policy (Vol. 25). While a broad consensus seems to have formed on several aspects of the problem, other areas remain controversial. One area of debate is the relative importance of the money and credit channels in the *I am grateful to Jan Brueckner, Wouter den Haan, Simon Gilchrist, Allan Meltzer, David Romer, and participants at the Carnegie-Rochester Conference for helpful suggestions, and to Simon Gilchrist and Egon Zakrajsek for kindly providing the data on small and large firms from the Quarterly Financial Reports. I thank the National Science Foundation for financial support.
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We study bank credit booms, exploiting the Spanish matched credit register over 2001-2009. We extend Khwaja and Mian (2008)’s loan-level estimator by incorporating firm-level general equilibrium adjustments. Higher ex-ante bank real-estate exposure increases credit supply to non-real-estate firms, but effects are neutralized by firm-level adjustments for firms with existing banking relationships. However, higher bank real-estate exposure increases risk-taking, by relaxing standards of existing borrowers (cheaper, longer-term and less collateralized credit), and by expanding credit on the extensive margin to first-time borrowers that default substantially more. Results suggest that the mechanism at work is greater liquidity via securitization of real-estate assets. This is an open access article under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/) which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
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he ‗real‘ economy consists of firms, households and other agencies engaged in the production of goods and services which can either be consumed now or put to use with a view to producing more in the future. Economic activity is conceptualized as ‗real‘ because real resources are applied to produce something which people can buy and use. The financial system is mainly concerned either with moving funds around so that those who wish to buy can do so, or helping people to exchange ownership of the productive resources. The activities of the real economy are essential to life. The real economy produces food, heating, lighting, consumer goods and entertainment, among other activities. The job of the financial system is to facilitate that by making sure that funds are available when and where they are wanted. In that regard, the issue of the structure of the financial system is brought to the fore as it would provide alternative financing windows which the operators in the real sector can...
Post‐crisis central bank unconventional policies and financialized transmission channels
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The ECB started €1 trillion worth of massive large scale asset purchase programme (LSAP), known popularly as quantitative easing (QE), when the evidence from the US where LSAP and other unconventional monetary policies have been in operation for the last seven years, shows that the transmission mechanisms have not worked as expected and private investments have not returned to the pre-crisis levels. Unemployment targets have been achieved but there are serious doubts about the quality of jobs created and the accuracy of the measuring the health of labour market-labour participation rate has declined and productivity has not improved. In a financialised economy firms seek shareholder value creation and have used low cost of borrowing in the U.S. to do share buybacks and tend to use high share prices to do acquisitions, neither activity leading to higher investments that would bring long-term economic growth and job creation. Shareholder value-driven banking firms aim to achieve high return on equity while de-risking their balance sheets which means higher risk weighted credit to real economy is not desirable. This paper will first critically question ECB's hubristic claims on how transmission channels would work under the recently launched LSAP to achieve the goals of higher private investments and job creation. Then in section two financialised firm behaviour will be explained before arguing, by using relevant data and small case studies, that such firm behaviour, both in non-financial and financial sectors, obstructs transmission channels from delivering the desired economic results and financial stability. The third section will conclude by underlining why academic and policy debates on unconventional central bank policies need to address financialised firm behaviour.
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Central banks have always recognised the importance of financial stability for overall macroeconomic performance, but questions related to the health of the financial system have traditionally taken a back seat to those more directly linked to the process of inflation and growth. In recent years, however, financial stability has gained greater prominence on central bankers' agenda. Monitoring the performance of the financial sector and the interaction between the health of financial institutions and macroeconomic stability has increasingly preoccupied central bank economists and decision-makers.